Uncertain times prove application ain't over till it's over

Home buyers and refinancers beware: The mortgage business is experiencing turbulence -- so the loan commitment you thought was solid could come unhinged.

At the end of July, a large lender, American Home Mortgage, based in Melville, N.Y., had its funding for new loans dry up as its creditors grew nervous over mortgages gone sour. Then, on Monday, it filed for bankruptcy protection.

That left some buyers without the funds they needed to buy a house.

"Some home buyers here who were set to be at the closing table were scrambling to get new financing," notes John O'Brien, Arlington Heights attorney and chairman of the Illinois Real Estate Lawyers Association.

While lenders specializing in subprime mortgages have been shutting, American Home Mortgage "is an active player" in the prime market, or loans to the most creditworthy borrowers, says O'Brien.

What happened with American Home Mortgage "could happen with other companies," says Bill McNamee, president of the Illinois Association of Mortgage Brokers and of Pinnacle Home Mortgage, Lombard.

That's why borrowers should check often with their broker to make sure their loan is on track to close, advises McNamee.

"I suggest applying for a loan with a large firm that also does a lot of other banking business, not a small company that just makes mortgage loans," adds Guy Secala, publisher of Inside Mortgage Finance, a trade publication based in Bethesda, Md.

Caution is the byword, says McNamee. Even when a mortgage company isn't experiencing a "liquidity" crisis, meaning it doesn't have funds to lend, it could raise standards for qualifying borrowers, he notes.

So, if you're on the "edge" -- say you are making a down payment of 5 percent of the purchase price and you have a credit score of 660 -- McNamee suggests taking a lock on the interest rate once you receive a loan commitment.

Asking for a lock usually doesn't cost anything when closing within 60 days. Though you won't benefit should interest rates turn down by then, a lock will guard against a lender deciding you're a high-risk borrower and upping the rate on your loan, McNamee says.

When American Home Mortgage backed away from funding at the end of July, 160 borrowers in Illinois had loans near closing from the company, says Sue Hofer, spokeswoman for the Illinois Department of Financial and Professional Regulation. Some 1,600 borrowers had applications with the firm.

The department is part of a multistate group of banking regulators, says Hofer, "and we are monitoring the situation." If borrowers who were left high and dry in other states do receive their funds from American Home Mortgage, the Illinois regulators also can press for the same here, she says.

However, "we don't have legal authority to get restitution for consumers," says Hofer.

Borrowers left without their anticipated American Home Mortgage loan will have to make a new application with another lender to buy a house, says Secala.

"You'll probably have to pay a new application fee and for a new appraisal," he adds.

Whether or not fees will be assessed in a new loan application will depend on the circumstances, says McNamee. He says his firm, for one, will absorb the extra charges.

Borrowers who want assistance with an American Home Mortgage loan can call the IDFPR hot line at 877-793-3470, says Hofer. She also advises consumers to visit the department's Web site (www.idfpr.com) to see whether the firm they're considering is licensed. Firms licensed with the state are more likely to respond to pressure from the IDFPR when it intercedes on behalf of a consumer, Hofer says.

As for homeowners who have a mortgage with a company that closes, there's usually nothing to worry about, says consumer advocate Jack Guttentag, who runs mtgprofessor.com. Nor do they have something to cheer about: A new company will take over billing, and you'll need to continue paying the mortgage.

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